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Mexican Peso Soars Amid Unexpected Rise in Inflation

  • The Mexican Peso extended its gains as the USD/MXN fell deeper below the 18.00 mark.
  • Mexico’s CPI soared by nearly 5% in June, driven by rising food prices and the depreciation of the peso.
  • Banxico Deputy Governor Jonathan Heath describes the inflation data as “very worrying,” indicating a hawkish stance.

The Mexican Peso soared during the North American session on Tuesday as June headline inflation exceeded consensus. This could prevent the Bank of Mexico (Banxico) from cutting interest rates amid a domestic economic slowdown. At the time of writing, the USD/MXN is trading at 17.90, down 0.56%.

Mexico’s economic agenda featured the Consumer Price Index (CPI), which jumped by nearly 5% in June due to rising food prices, the National Institute of Statistics and Geography (INEGI) revealed. This and the depreciation of the Peso by more than 6% in June triggered a price increase. Other data showed that consumer confidence improved slightly, while car exports slowed sharply.

Following the data, Banxico Deputy Governor Jonathan Heath wrote on X that June’s inflation data was “very worrying.” Traders should be aware that he leans toward the central bank’s hawkish stance along with Deputy Governor Irene Espinosa.

Market participants are looking ahead to the release of Banxico’s latest monetary policy meetings on Thursday, which are expected to show that the Mexican institution will be patient before reducing borrowing costs.

Across the border, Federal Reserve (Fed) Chairman Jerome Powell appeared before the US Senate Banking Committee and stated that the disinflation process is evolving and that the risks of achieving the dual mandate have become more balanced. He added that Fed officials needed more good inflation data to cut interest rates. However, an unexpected weakening in the labor market could be another reason for policy easing.

Daily Market Wrap: Mexican Peso Rises on Hot CPI Data

  • Some analysts in Mexico estimate that the economy could slow down but avoid a recession, according to the Coincident Indicator of the National Institute of Statistics and Geography (INEGI). Despite that, they said that the reforms promoted by President Andrés Manuel López Obrador (AMLO), particularly the judicial reform, could affect the country’s creditworthiness.
  • Mexico’s CPI rose from 4.69% year-on-year to 4.98% in June, while the core CPI fell from 4.21% to 4.13% year-on-year, beating the estimate of 4.15%.
  • Auto exports in June slowed from 13% in May to 3.3% year-on-year in June, while auto production slowed from 4.9% to 3.8% in June.
  • On Monday, the New York Federal Reserve revealed that consumer inflation expectations were lowered from 3.2% to 3% for one year.
  • US CPI is forecast to fall to 3.1% from 3.3% in the 12 months to June, while core inflation is projected to remain firm at 3.4% year-on-year.
  • The US Dollar Index (DXY), which tracks the value of a basket of six currencies against the US dollar, is up 0.16% to 105.17.
  • According to CME FedWatch data, the probability of a September cut is 70%, down from 73% on Monday.

Technical Analysis: Mexican Peso Fights Back as USD/MXN Falls Below 18.00

The USD/MXN has reached a ten-day low of 17.91, although it remains slightly above the June 24 cycle low of 17.87, which if broken could extend the Dollar’s losses. Momentum favors the shorts as the Relative Strength Index (RSI) fell below the neutral line of 50.

That said, if USD/MXN manages a daily close below 18.00, the next support would be the June 24 low of 17.87. Further losses are anticipated below the 50-day simple moving average (SMA) at 17.56, followed by the 200-day SMA at 17.26. The next support level would be the 100-day SMA at 17.17.

For a bullish resumption, USD/MXN needs to clear 18.10, followed by a rally above the June 28 high of 18.59, allowing buyers to challenge the yearly high of 18.99. Conversely, sellers will need to push the pair below 18.00, which could extend the decline towards the December 5 high-turned-support at 17.56, followed by the 50-day SMA at 17.37.

Banxico FAQs

The Bank of Mexico, also known as Banxico, is the country’s central bank. Its mission is to preserve the value of Mexico’s currency, the Mexican Peso (MXN), and to set monetary policy. To do so, its primary goal is to maintain low and stable inflation within target levels (at or near its 3% target, the midpoint of a tolerance band of between 2% and 4%).

Banxico’s main tool for guiding monetary policy is setting interest rates. When inflation is above the target, the bank will try to control it by raising rates, making it more expensive for households and businesses to borrow money and thus cooling the economy. Higher interest rates are generally positive for the Mexican Peso (MXN), as they generate higher returns, making the country a more attractive place for investors. Conversely, lower interest rates tend to weaken the MXN. The rate differential with the Dollar, or how Banxico is expected to set interest rates compared to the US Federal Reserve (Fed), is a key factor.

Banxico meets eight times a year and its monetary policy is heavily influenced by decisions of the US Federal Reserve (Fed). Therefore, the central bank’s decision-making committee usually meets a week after the Federal Reserve. By doing so, Banxico reacts to and sometimes anticipates the monetary policy measures set by the Federal Reserve. For example, after the Covid-19 pandemic, before the Fed raised rates, Banxico did so first in an attempt to decrease the chances of a substantial depreciation of the Mexican Peso (MXN) and avoid capital outflows that could destabilize the country.

Source: Fx Street

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